Small business owners are in need of money, and this is true for companies that are new. There are two types of funds available to small business owners: debt financing and equity financing. Now, the next question is, as a small business owner, what is the best for you?
Kavan Choksi is a credible entrepreneur who is an expert in business matters and finance. According to him, debt financing is similar to using a credit card to purchase a home or a car. You take the loan and pledge to pay it back along with interest. The same holds true for debt financing when you apply it for your business.
As the owner of a business, you have the option to borrow the loan from the bank, or you can ask your friends and family or even other lenders for a personal loan. However, for everyone, you must pay this loan back. Even if a family member lends you funds for your business, they should charge you with the minimum rate of IRS interest so that you can avoid the gift tax.
There are a number of advantages with debt financing, the first being the lender gets no control over the business you own. When you pay the loan back, the relationship with the lender ends. The second advantage is that the interest you pay is tax-deductible, and the last benefit is that you can forecast all the costs as the payments for the loan do not change.
The only downside of this type of finance for your business is your future of paying back the debt.
Equity financing entails the participation of investors where you can offer shares to the public from your company. This sort of business finance involves the role of angel investors or venture capitalists. Here, the idea has to be presented to the group of investors who offer equity finance. As a business owner, you enjoy more cash as no payments of loans are involved. Finally, the investors have the experience of business, and they can guide you on how to expand it.
When it comes to the disadvantage of equity financing, you will find it is huge. In order to get the funds, you need to offer the investor a share of your company. This means you would have to share profits and consult them every time you need to make a decision about your company. If you wish to remove them from your company, the only way you can do so is to buy them out. This step is much more expensive than the funds they agreed to give you in the beginning.
According to Kavan Choksi, you need to consider both of these business funding options very carefully before you make a decision. However, it is very hard for you to secure if you are a new small business owner if you are looking for equity financing. In such cases, you should opt for debt financing options for your business.